Key points
- Dividend: 23% corporate tax and then 30% dividend tax — a combined rate of 46.1%.
- Salary: tax brackets up to 47%, surtax, National Insurance and health tax.
- The optimal mix depends on the company's profit, other income and pension considerations.
A controlling shareholder in a closely held company may withdraw money from the company as salary, as a dividend, or as a combination of both. Each is taxed differently, and the optimal mix depends on the company's profit, the controlling shareholder's other income and the need to build pension rights.
Dividend — taxed in two layers
The profit is first subject to 23% corporate tax, and then the dividend to a substantial shareholder is taxed at 30%. The combined rate: 23% + (77% × 30%) = 46.1%. Above the surtax threshold, a 5% surtax is added on the dividend, and the combined rate reaches about 50%.
Example — dividend
- Profit before tax in the company: ILS 100,000.
- Corporate tax: 100,000 × 23% = ILS 23,000; dividend available for distribution: ILS 77,000.
- Dividend tax: 77,000 × 30% = ILS 23,100; net to the shareholder: ILS 53,900.
- Total tax: 23,000 + 23,100 = ILS 46,100 — a combined rate of 46.1%.
Salary — brackets, National Insurance and surtax
Salary is a deductible expense for the company (saving corporate tax), but it is taxed at the income tax brackets — up to 47% — and a 3% surtax above the threshold. In addition, National Insurance and health tax are paid, both the employee and employer shares, up to the monthly income ceiling.
General conclusions
- Salary within the lower tax brackets almost always pays off — its tax rate is below 46%.
- In the higher brackets, together with National Insurance, a dividend is usually cheaper.
- Above the National Insurance ceiling the gap narrows, and considerations such as pension savings, credit points and other income decide.
The link to sections 81 and 62A
Withdrawing by dividend helps meet the exemption tests under section 81, and a dividend to active shareholders is also taken into account for section 62A(a1). The decision on the mix should take these into account as well.
Further considerations
- Pension savings — salary allows contributions to provident and study funds, while a dividend does not.
- Credit points — apply to employment income and reduce the tax on salary.
- National Insurance rights — accrue on employment income.
- Section 81 — a dividend counts for the exemption tests, while a salary increases the expenses shield.
- Section 62A(a1) — a salary to the shareholder reduces the profitability rate of the activity.
Recommended work order
- Determine the company's profit before the owner's salary.
- Estimate the controlling shareholder's other income for the tax year.
- Review several mixes of salary and dividend and compute the net amount for each.
- Weigh the pension considerations and the effect of the mix on sections 81 and 62A.
- Set the mix and update the monthly salary and advance payments.
Frequently asked questions
Is a dividend always better at high incomes? Not necessarily. Above the National Insurance ceiling the gap narrows, and considerations such as pension savings may decide.
Can the mix be changed during the year? Yes. It is recommended to review the mix during the tax year, based on a tax estimate, and not only after the year ends.
Sources
- Income Tax Ordinance, sections 121, 121B, 125B and 126
- National Insurance and health tax rates for a controlling shareholder
Rates and amounts are correct as of the update date. This is a translation of the Hebrew article; in case of a discrepancy, the Hebrew version prevails.
This article is for general information only. It does not constitute tax advice or a professional opinion, and does not replace a specific review of each case.